The Political Economy of Syria's Physical Fragmentation and Dependence
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SYRIA TRANSITION CHALLENGES PROJECT Discussion Paper 35 The Political Economy of Syria’s Physical Fragmentation and Dependence Samir Aita President of the Circle of Arab Economists SYRIA TRANSITION CHALLENGE PROJECT Discussion Paper 35 The Geneva Centre for Security Editor Policy (GCSP) Abdulla Ibrahim, Project Lead The Geneva Centre for Security Researcher Policy (GCSP) is an international foundation established in 1995, with Author 53 member states, for the primary Samir Aita purpose of promoting peace, security and international President of the Cercle des cooperation through executive Economistes Arabes. Former editor- education, applied policy research in-chief and general manager of Le and dialogue. The GCSP trains Monde diplomatique éditions arabes. government officials, diplomats, Lecturer in political economy at the military officers, international civil University of Paris-Dauphine, Paris II servants and NGO and private Sorbonne, and Saint Joseph sector staff in pertinent fields of University of Beirut. Consultant in international peace and security. economics, finance, labour and urban planning. Born in Damascus, Syria, in 1954; studied at Ecole Polytechnique Syria Transition Challenges and Ecole Nationale des Ponts et Project Chaussées; completed postgraduate A multilateral dialogue and research studies at the Ecole Pratique des project that aims to build bridges Hautes Etudes en Sciences Sociales, between the EU, Russia, Turkey, and the Institut National des Sciences et the US on the three issues of Reform, Techniques Nucléaires, and HEC Refugees Return, and Executive Management (CPA-HEC). Reconstruction. The project is run by the GCSP in collaboration with European University Institute (EUI), Syrian Centre for Policy Research (SCPR), and swisspeace. The ideas expressed are those of the author and not necessarily those of the author’s affiliation or the publisher. Published in August 2021 All rights reserved by the GCSP 2 SYRIA TRANSITION CHALLENGE PROJECT Discussion Paper 35 The Political Economy of Syria’s Physical Fragmentation and Dependence Summary • Syria’s physical fragmentation and dependence on foreign powers and neighboring countries have created significant new dimensions of political economy in the country over the course of the conflict. • Oligopolies controlling cross-border foreign trade and its financing in the fragmented areas of the country now play a major role, especially in the wake of the extensive disruption created by Lebanon’s economic and financial crisis. Such oligopolies are closely connected with the controlling powers in these areas and with the countries that back them. • Local warlords, linked to local combatants, control the internal crossing points still necessary for trade, the provision of basic goods and services, and humanitarian aid distribution. Local governance is directly associated with these warlords. • Smuggling is unavoidable across the country’s external borders and internal lines of separation, given the large differences in the prices of goods. • In-kind humanitarian aid, a long-term undertaking, is distorting local markets where locally produced goods are sold. This discourages local production and undermines economic resilience, employment perspectives and the scope for recovery. • The ongoing changes to the country’s political economy could lead to further physical fragmentation and impede the emergence of political solutions to the conflict. Introduction Most political economy analyses on present-day Syria tend to be based on pre-conflict perspectives and mechanisms. However, the country’s economic reality has changed significantly after ten years of conflict. Syria is currently divided into three1 areas of influence, where the supply chains for goods and services are differentiated and much less integrated than before. The resulting value chains have introduced new rent-seeking mechanisms that reflect local power structures, differentiated import channels resulting from the unilateral measures (sanctions), international aid and its recycling2 in the economy, and the remaining and still necessary economic exchanges between the three areas of influence. These new dimensions of political economy can be traced directly to the country’s physical fragmentation and dependence and took shape over the course of the conflict. They have become increasingly entrenched, particularly since 2016, as ISIS lost control over large parts of the country and the conflict de-escalated in relative terms. 1 One could argue that there are five areas, as the Idlib region is economically separate from the areas controlled directly by Turkey and the armed “opposition” factions loyal to it, and since the Syrian government does not have full authority over the Hauran region in the South. 2 The term recycling refers here to the population reselling the aid-related goods they receive to traders, who in turn resell these same goods again in the market. 3 SYRIA TRANSITION CHALLENGE PROJECT Discussion Paper 35 Furthermore, all regions of Syria experienced an economic and financial crisis starting in mid- 2019, in parallel with the ongoing Lebanese economic and financial crisis. This led to a collapse in the exchange rate of the Syrian pound that was similar in value terms to that of the Lebanese pound (figure 1). Inflation rose at unprecedented rates, further disrupting the economic mechanisms at play in the different areas of the country. The situation was exacerbated by the Covid-19 pandemic, which complicated people’s livelihoods even more. Financial and foreign-trade chains The Syrian economy has become extremely dependent on migrant remittances and the flow of international aid, which together are estimated to surpass one-third of current GDP. The real value that reaches the recipients depends greatly on official mechanisms (such as the official exchange rate) and on the money traders’ channels stretching across the three areas of influence and in neighbouring countries. Private-sector imports in government-held areas (GOS) were in large part financed by the Lebanese banking sector and channelled through the port of Beirut. They shrank3 once these banks blocked foreign currency deposits, and decreased further following the Beirut port explosion on 4 August 2020. Imports to North-East Syria (NES) also declined, as the government sought to avoid depleting its foreign currency reserves, going so far as to stop its hard-currency purchases of the much-needed oil from NES. The same applies to North-West 3 As did exports through Beirut’s port and airport. 4 SYRIA TRANSITION CHALLENGE PROJECT Discussion Paper 35 Syria (NWS): its imports declined, as a large proportion of them were destined to be smuggled to government-held areas. This led to the emergence of new foreign-trade financing circuits. Similarly, the role of conveying remittances to Syria shifted largely from Lebanon to Turkey, as well as to the Gulf countries, whose banks now dominate Syria’s private banking sector. The prices of goods and services have risen dramatically in all parts of the country but at significantly different rates depending on the item in question and the area of influence. Throughout this time, exchange rates remained very close in all three areas. The move to use the Turkish lira in NWS has exacerbated inflation there. It was not until March 2021 that the Syrian government managed to stabilize the exchange rate,4 find a way to rein in the high inflation, and free itself from the ever-deteriorating situation in Lebanon and the exchange rate for the Lebanese pound. But this was accompanied by a major and unsustainable decline in consumer spending, the reduced availability – or outright disappearance – of many goods and services, and a sharp increase in poverty and extreme poverty in all areas of the country. The country’s most powerful “warlords” are those who dominate the financial and foreign trade circuits described above. They have direct links with the ruling powers in each of the three areas of influence. In NES, these warlords are involved in the informal exportation of oil, wheat, cumin and sheep, as well as in the importation of goods through the Semalka informal border crossing with the 4 Following a period of stability between 2016 and mid-2019. 5 SYRIA TRANSITION CHALLENGE PROJECT Discussion Paper 35 Iraqi Kurdish Regional Government (KRG). One Iraqi-Kurdish-Turkish-German company seems to dominate most of these imports, which come largely from Turkey but also from Iran. In NWS, exports are meagre. However, imports from Turkey to NWS exceed US$ 1.3 billion per year, an amount similar to the pre-conflict level of all of Syria’s imports from Turkey (figure 2).5 The warlords of Azaz, Al-Bab and other cities north of Aleppo, with their Turkish licenses for imports through the Bab al-Salam border crossing, compete with those of Sarmada and other cities around Idlib who bring imports through the Bab al-Hawa border crossing, which is also used for humanitarian aid. That first group of warlords is directly linked with the different combat factions of Operation Euphrates Shield and Operation “Olive Branch” in Afrin; the latter group is directly connected with Hay’at Tahrir al-Sham (HTS, previously the Al Nusra Front). For the much larger population in GOS areas, the volume of imports from Turkey during the years of the conflict far exceeds that from Iran.6 In these GOS areas, the volume of imports 5 See also Trade without Religion between Turkey and Syria; IFRI Editorial, https://www.ifri.org/sites/default/files/atoms/files/aita_trade_without_religion_turkey_syria_2017.p